2018 (2) TMI 1151 - AT - Income Tax

Transfer pricing adjustment - international transaction of Provision of ITES - aggregation of both the SDS and ITES and treating the assessee as an ITES provider for the purposes of choosing comparables and benchmarking - Held that - The assessee did not have any authenticated figures of revenue and costs in respect of ITES and SDS separately. Once the position is such that neither the revenue from two segments can be ascertained nor its costs, we fail to appreciate as to how the benchmarking can be done for two separate transactions of ITES and SDS in a separate manner. Ergo, we approve the action of the authorities below in aggregating the ITES and SDS segments for the purpose of benchmarking. Selection of the comparables - selecting companies rendering only ITES renders the comparison incompatible due to the basic functional difference, thereby vitiating the entire exercise of benchmarking. What is required to be done is to select companies rendering both ITES and SDS. As this exercise can be properly done at the end of the TPO, we set aside the impugned order on this score and remit the matter to the file of TPO/Assessing Officer for determining the ALP of the assessee s combined international transaction of Provision of ITES and SDS afresh by considering such companies as comparable which are rendering both ITES and SDS. Needless to say, the assessee will be allowed a reasonable opportunity of being heard in such proceedings. Transfer pricing adjustment in the international transaction of Interest on receivables - It is seen that the assessee reported an international transaction of Interest on receivables amounting to ₹ 49,18,007/-. It is further discernible from the Agreement that no credit period has been prescribed for realization of invoices. On a specific query, it was admitted that there were no trade transactions with non AEs. In such a scenario, it is difficult to make any comparative analysis of the time allowed for realization by the assessee to AEs vis- -vis non-AEs. Applying the decision in Kusum Health Care (2017 (4) TMI 1254 - DELHI HIGH COURT), the Hon ble High Court directed the TPO to study the impact of the receivables appearing in the accounts of the assessee; looking into the various factors as to the reasons why the same are shown as receivables and also as to whether the said transactions can be characterized as international transactions. In view of the above decision in Avenue Asia Advisors (2017 (9) TMI 1295 - DELHI HIGH COURT), we deem it appropriate to set aside the impugned order on this issue and remit the matter to the file of the Assessing Officer/TPO for deciding it in conformity with the above referred judgment

Summary

Issues Involved:
1. Transfer pricing adjustment for the provision of ITES and SDS.
2. Selection of comparables for benchmarking.
3. Transfer pricing adjustment for interest on receivables.

Issue-wise Detailed Analysis:

1. Transfer Pricing Adjustment for Provision of ITES and SDS:

The assessee, an Indian entity and part of the Orange group, was engaged in providing IT enabled network management/technical support and software development services to its group companies. The primary issue was the aggregation of IT enabled services (ITES) and Software Development Services (SDS) for benchmarking purposes. The Transfer Pricing Officer (TPO) aggregated both services and benchmarked them together, resulting in a transfer pricing adjustment of ?16.91 crore. The assessee contended that these services should be benchmarked separately, citing the principle of consistency as reiterated in Radhasoami Satsang vs. CIT (1992) 193 ITR 321 (SC). However, the Tribunal found this contention without merit, emphasizing that the rule of consistency should not jeopardize the benchmarking process. The Tribunal held that the assessee did not have authenticated figures for revenue and costs for ITES and SDS separately, justifying the TPO’s aggregation approach.

2. Selection of Comparables for Benchmarking:

The TPO selected comparables rendering only ITES services, which the Tribunal found incompatible due to the functional differences between ITES and SDS. The Tribunal directed the TPO to select companies rendering both ITES and SDS for a proper benchmarking exercise. This decision was based on the need for a functional comparison that accurately reflects the combined nature of the services provided by the assessee.

3. Transfer Pricing Adjustment for Interest on Receivables:

The assessee reported an international transaction of ‘Interest on receivables’ amounting to ?49.18 lakh. The TPO applied an interest rate of 12.87% per annum on the outstanding amount, resulting in a transfer pricing adjustment of ?8.05 crore. The Dispute Resolution Panel (DRP) increased the reasonable number of days for realization from 30 to 60 days, but the TPO did not implement this direction. The Tribunal referred to the judgment of the Hon’ble Delhi High Court in Pr. CIT vs. Kusum Health Care Pvt. Ltd. (2017) 398 ITR 66 (Del), which held that there must be a proper inquiry into the pattern of receivables and their impact on the working capital before treating them as an international transaction. The Tribunal set aside the impugned order and remitted the matter to the TPO/AO for a fresh decision in line with the Delhi High Court’s judgment.

Assessment Year 2012-13:

The only issue raised was the transfer pricing adjustment of ?5.90 crore for interest on receivables. The Tribunal noted that the facts and circumstances were similar to the subsequent year (2013-14). Following the same rationale, the Tribunal set aside the impugned order and remitted the matter to the TPO/AO for a fresh decision, ensuring a reasonable opportunity of hearing for the assessee.

Conclusion:

Both appeals were allowed for statistical purposes, with the Tribunal directing fresh consideration by the TPO/AO in light of the detailed analysis and legal precedents discussed. The order was pronounced in the open court on 15.02.2018.